SEC Charges Private Fund, Fund Officer and Employee for Activities as an Unregistered Broker (with Lofchie Comment)

The SEC charged a NY-based private equity adviser, a former senior executive and an employee for violating securities laws by reason of the employee, who was not a registered as, or associated with, a broker-dealer, soliciting more than $500 million in capital commitments for private funds managed by the adviser. The adviser, the former senior executive and the employee agreed to settle the SEC's charges.

According to the enforcement release, the relevant employee was supposed to act in the capacity of being a "finder," but his activities went beyond that. The employee's activities cited in the release included:

(1) sending private placement memoranda, subscription documents, and due diligence materials to potential investors;(2) urging at least one investor to consider adjusting its portfolio allocations to accommodate an investment with the fund;(3) providing potential investors with his analysis of the funds' strategy and performance track record; and (4) providing potential investors with confidential information relating to the identity of other investors and their capital commitments.

The SEC also sanctioned the adviser and an executive of the adviser for facilitating the activities of the employee, knowing that the employee was acting in a role that went beyond that of a traditional finder.

Lofchie Comment: Historically, the scope of marketing activities which an employee of an adviser may conduct before crossing the line into becoming a securities "broker" has not been clear. The SEC has not generally brought enforcement actions against employees who may have crossed that line, except in cases where either the employee or the fund was engaged in fraudulent conduct. This case is notable because, among other things, there was no assertion of fraud (although one of the charged individuals had been previously sanctioned and was conducting activities in violation of the terms of that sanction).I do not know whether this case is a one-off or whether the SEC intends to patrol more closely the dividing line between "finder" activities and "broker" activities. Given the significant increase in the number of large private fund advisers who are now required to register with the SEC, it is certain that the SEC will have more visibility into the capital-raising activities of private funds and, thus, the SEC may more readily see activities that it believes cross the line. Accordingly, it would behoove fund advisers to review their fund-raising procedures closely, not only for compliance with the requirements of the Advisers Act, but also for compliance with the Securities Exchange Act and the related broker-dealer rules.I also note that while the adviser was required to pay a fine, there was no discussion of the potentially most significant penalty: allowing investors to rescind their purchases of fund shares and being made whole for any losses.

See: SEC Order: William M. Stephens; SEC Order: Ranieri Partners LLC and Donald W. Phillips.See also: SEC Press Release.See generally: Lofchie's Guide to Broker-Dealer Regulation: Registration Requirement (see in particular the discussion of "finders" in Section I.B. of the Chapter).